Ages ago in ancient Rome, the architects were not just the masterminds behind the bridges; they were the ones who risked life and limb for their beloved creations. Imagine them standing beneath those colossal arches, they inhaled the gritty air, mingled with the smell of fresh mortar, as they oversaw the final moments of the scaffolding's descent. Every speck of dust settling on their shoulders spoke of their unyielding dedication. For them, it wasn't merely about building a bridge; it was about their safety too. If the bridge were to crumble, they would be the first ones to face the brutal consequences - That right there, is called having ‘Skin in the Game’.
Now, imagine the vast expanse of the tumultuous seas, picture a captain, weathered by countless storms, holding onto the rudder of a sinking ship with unwavering determination. Every wave crashing against the vessel's sides echoed the spirit within. With bravery, the captain refused to abandon the ship's crew, persisting until the very last moment. This tale of resilience and fortitude was etched into the lores, embodying an unwritten code of guardianship.
What did ship captains and Roman bridge architects have in common? They were made to take the same risks as their contemporaries and bear the fruits depending on the quality of their work. In case any calamity was to befall, they were the first ones to take the hit, paying the price of their actions whether they be good or bad. The former meant celebration, and the latter meant death. This spirit of sharing the risks, and forgoing short-term gains has been famously called by Nassim Nicholas Taleb as ‘Skin in the Game’, also the name of the book in which he expands his ideas.
Now let’s talk about the application of this concept to modern times and the world of finance where financial advisors are the navigators of the labyrinth that is the market. But some of them aren't just observers; they're active participants, investing their wealth into the strategies they propose. Through their risk exposure, they stand the test of time.
Their hearts sink at every loss of the market, just as much as their clients. Similarly, they equally celebrate, when they win the spoils of the trade. Embracing the ethos of 'having skin in the game,' these advisors emerge as beacons of trust, ready to weather the unpredictable tides of financial markets alongside those who rely on their guidance.
Taleb’s Take
Taleb stated in his book, "Risk comes from not knowing what you're doing." This emphasis on accountability and understanding risk highlights how having skin in the game promotes credibility in financial advising.
In his book, he underscores the necessity of aligning interests in financial transactions. He highlights that those who put their own wealth at stake tend to act more prudently and responsibly. He aptly puts it, "People are not very good at looking at the long-term consequences of their own actions, especially if they can make more money in the short term."
He further says, that skin in the game promotes ethical behaviour, and also the quality of learning from pain. He underlines how by having skin in the game, one can achieve the “Lindy Effect” - the ability to stand the test of time through quality. Something that outlasts its competitors.
Tales of Caution
Taleb in his book talks about the absence of skin in the game through ‘Agency Problem’ taking the example of institutions like journalism and corporate governance. He highlights how people who do not have money where their mouth is, have the propensity to act unethically.
For example, take the case of whistle-blowing on one’s own company in the case it’s engaging in illicit activities. Most would lie low to save themselves. In this case, other’s skin in the game and unfair advantages affect your decisions. You have more skin in the game than your company, which lends the company the unethical upper hand over you. This absence of skin in the game is what caused the Lehman Brothers’ crisis in 2008, precipitating into global economic adversity.
A Necessity More than Ever
In the dynamic landscape of digital finance, the significance of having skin in the game has become more pertinent than ever. The rise of decentralised finance and the proliferation of digital investment platforms have created a complex and rapidly evolving financial ecosystem, necessitating an increased emphasis on accountability and integrity.
The Gist
In conclusion, the philosophy of having skin in the game has profoundly influenced the practices and success stories of renowned financial advisors and firms throughout history. The integration of this principle has not only solidified the credibility of these financial giants but has also instilled a sense of trust and accountability within the industry. By being the captain of their own ship, financial advisors can ensure that their strategies are not only robust but also truly aligned with the long-term interests of their clients, thus forging a path toward sustainable and prosperous investment endeavours.
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